Cost To Company - CTC:
Cost
to Company or CTC as it is commonly called, is the cost a company
incurs when hiring an employee. CTC involves a number of other elements and is
cumulative of House Rent Allowance, Provident Fund and Medical Insurance among
other allowances which are added to the basic salary. These allowances may
often include free meals or meal coupons, such as Sodexo and the like, office
space rent, cab service to-and-fro office, and subsidized loans et al.
Basically, all these elements when combined together, form the entire Cost To
Company.
To
put it in simpler terms, CTC is basically a company’s spending on hiring and
sustaining the services of an employee.
Let’s
elucidate what CTC looks like with an example:
Mr. A
has been hired by a company at a CTC of Rs. 4,00,000. A breakdown of his yearly
income is illustrated below:
Basic Salary: Rs. 2,20,000
HRA: Rs. 88,000
CA: Rs. 19,200
Medical Expenses: Rs. 15,000
EPF Contributions: Rs. 21,600
Gratuity: Rs. 18,326
Special Allowance: Rs. 17,874
CTC
is basically the sum total of Direct Benefits (sum paid to an employee on a
yearly basis), Indirect Benefits (sum the employer pays on behalf of the
employee), and Saving Contributions (saving schemes the employee is entitled
to).
CTC = Direct Benefits +
Indirect Benefits + Savings Contributions
Here’s every single element of a
CTC broken down:
Basic Salary: Unlike other
aspects of CTC, your basic salary will not vary and remains a constant always.
The entire amount of your basic salary will be part of your in-hand salary.
Allowances: As part of your
salary structure, you will receive a number of allowances which help you take
care of your basic needs. These include:
House Rent Allowance (HRA): HRA
is part of the CTC an employer provides its employees. HRA usually comes with
tax benefits in case employees pay for accommodation each year and comes up to
about 10% of the take-home salary.
Leave Travel Allowance (LTA): LTA
is yet another tax-exempt element of a CTC which is provided for employees to
cover their travel expenses anywhere within the country. Note that an LTA only
pays for the travel allowance not for other expenditures like food, drinks, and
the like.
Dearness Allowance (DA): Inflation
numbers keep rising year or year and Dearness Allowances are provided to tackle
this issue. This is basically a cost of living adjustment given to mitigate the
effects of inflation on the economy. Other
such allowances include medical, vehicle, mobile phone, incentives, and
special allowances.
Gross
Salary:
Gross
Salary is employee provident fund (EPF) and gratuity subtracted from the Cost
to Company (CTC). To put it in simpler terms, Gross Salary is the amount paid
before deduction of taxes or other deductions and is inclusive of bonuses,
over-time pay, holiday pay, and other differentials.
Employee
Provident Fund, in India, is an employee-benefit scheme prescribed by the
Ministry of Labor which provides employees with facilities such as medical
assistance, retirement, education for children, insurance support, and housing.
The Employee Provident Fund Organization (EPFO) has the authority to mandate
policies on EPF, pension, and insurance schemes. The employer is required to
contribute at least 12% of the employee’s salary towards his/her EPF.
Furthermore,
the employee can then withdraw the full amount accrued in his/her PF account at
the time of retirement, which is when the employee attain the age of 55 years.
In
the occurrence of any of the following situations also, the employee can
withdraw the amount accumulated in his/her PF account-
·
Termination of services
·
Retirement due to permanent
disability
·
Migration for taking employee abroad
Gratuity
on the other hand, is a section of an employee’s salary that is paid by the
employer as a token of gratitude for the services the employee offered during
the employment tenure. It is a defined benefit plan offered to the employee at
the time of his/her retirement.
An
employee may leave his/her job for various reasons, such as,
retirement/superannuation, for a better job elsewhere, on being retrenched or
by way of voluntary retirement.
Under
Section 10 (10) of the Income Tax Act, an employee receives gratuity after
completing 5 years or more of full-time service in an organization.
For
the same example listed above, let’s deduce Mr. A yearly salary by subtracting
gratuity and Employee Provident Fund contributions.
Rs.
4,00,000 - Rs. 21,600 - Rs. 18,326 = Rs. 3,60,074
This
amount will now be considered as his gross salary, which is his total personal
income before taking taxes and other deductions into consideration.
Net Salary or Take-Home
Salary:
Net
salary, more commonly known as Take-Home Salary, is the income that the
employee actually takes home once tax and other such deductions are carried
over with. It refers to the in-hand figure that is calculated after deducting
Income Tax at source (TDS) and other deductions as per the relevant company
policy.
Net
Salary is Income Tax deductions, Public Provident Fund, and Professional
Tax subtracted from gross salary, which means,
Net
Salary = Gross Salary (-) Income Tax (-) Public Provident Fund (-) Professional
Tax
Public
Provident Fund and Employee Provident Fund are a stipulated percentage of the
employee’s salary, typically no less than 12% of the basic salary. Whereas,
gratuity is a percentage of the basic salary, typically 4.81% of the employee’s
basic salary.
Therefore,
an employee’s take home pay should ideally look like-
Take Home Pay / Net Salary
= Direct benefit (-) deductions (taxes, PF etc.)
Income Tax in this case, is
deducted at source by the employer and is based on the gross pay of the
employee. Also, basic salary of an employee should be at least 50%-60% of
his/her gross salary.
Mr. A’s Salary Example:
In Mr. A’s case, he comes under the 10% Tax
Slab as his salary falls between the Rs. 2,50,001- Rs. 5,00,000 range.
Mr. A’s income stands at Rs. Rs. 3,60,074.
10% of Mr. A’s income would come up to Rs.
36,007.4.
So, Mr.A’s income after tax and other deductions
would be Rs. 3,24,066.6
Bottom-line, the various aspects of a salary
isn’t as complicated as it is made out to be. A quick read of this page would
give you all the details you will ever need.
#rahulinvision
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